Today I want to review precisely how rent to own works, especially as a way for new real estate investors to get moving without a ton of money down. For all intents and purposes, rent to own is another way to say lease option in real estate investing, so let’s dig in, hunker down, and get ready.
How Does Rent to Own Work?
The terms rent to own and lease option work pretty interchangeably, and some people will even mix owner financing in, too. Here’s why: all of these terms say the same thing. “I am going to rent this house every single month for the next five or ten years.” Essentially, when I am looking to buy a house from a seller, I become a glorified tenant to them. But, bonus, I also have the right to buy the house from them within those 5-10 years.
They cannot sell it to anyone else, and they cannot rent it to anyone else. I am the person who they are dealing with. It’s mine; my house, my rent agreement, mine. I control the house. My monthly payments go towards me purchasing this house. Got it?
Now, on the flip side, when I am selling a house with a lease option/rent to own, I only give my tenants one to two years to rent the house before they have to own it. So, within those 1-2 years, my tenants are paying me the monthly rent that we agree is appropriate for the terms of their purchase option.
Why is this beneficial for my renters?
The fact is that you do not know how many people really need options like this in order to own a house! During those 1-2 years, my tenants are establishing their credit, securing their job history, and waiting for those two years of time in order to obtain a mortgage. These are good people! They just need a helping hand of time in order to get to their goal of homeownership.
In addition, when I work with a new tenant for one of my rent-to-own properties, my goal is to help train them to become effective homeowners. What does this mean? This means that I do not treat them like renters, and they should not treat me as a landlord. If something goes wrong in the house, they are trying to become the homeowner and need to act like it. When a mortgage holding homeowner has a water leak in their house, they don’t call the mortgage company and complain. They take care of the water leak on their own with either a professional service or with their own two hands.
This is important because if they are serious about owning a home, this will ensure that they are putting some skin in the game besides simply paying “rent.” And at the end of their 1-2 year contract time, they have a higher likelihood of following through their purchasing the home because they have come to see it as their own, rightfully so.
It’s a big difference from simply “renting” a house. The mindset change is important.
Let’s do the math with a rent to own…
As I mentioned, if I am buying a house with rent to own, I have set things up so that I have 5-10 years to pay off the seller. During that time I pay my monthly rent, and either a portion of that amount or 100% of it will be paying down the agreed-upon purchase price. If the house is owner financed (meaning the seller has no mortgage on the house, so my rent goes right to them), then I will get 100% of my rent paying down my purchase price. But, if the seller has a mortgage, likely only a portion of my monthly rent will be paying down my purchase price, which is often about 20% (this is because not all of a mortgage payment goes to the principal).
Ok, I hope I have not lost you. But, take your time and pay attention, because this is important.
So, let’s say that for a $100,000 purchase price, I get a 20% credit and am paying $1000 a month in rent; that is $200 each month, or $2400 a year comes towards the $100,000 I owe. After a year, I will owe $97,600, and after two years $95,200, etc. etc. Then, after ten years, I should have paid off $24,000 from my original $100,000 purchase price. This brings me to $76,000 to pay at the end of my 10-year agreement.
But, don’t forget…that is only one side of the equation. There’s more!
And, this is where I get SUPER excited. THIS is where we make the MONEY, honey!
What I just explained to you is the buying side of my transactions. Now, let’s talk about the selling side.
On this side, when I am selling the house to my tenant buyers, let’s say that I am selling the house for $120,000. At $120,000, they give me $10,000 to move in and I give them a year to figure out their mortgage. During that time, they pay me $1200 for rent each month.
So, this tenant’s rent will cover the $1000 that I need to pay the original seller of the house, PLUS I am getting $200 profit each month. AND, I also got a sweet $10,000 upfront as a fee for the nonrefundable rent-to-own option. The first $5,000 of that money goes to me without question, but the rest is put towards paying down their purchase price. See that? Got it? Awesome. Let’s keep going.
When I subtract that $5000 from the agreed purchase price of $120,000, we have $115,000 that they will still owe me at the close in a year’s time. Remember, after one year, I will owe $97,600 on the property to the original seller, which means if my tenant-buyer gets a mortgage that I will make an additional $18,400 at the close of the deal. Add to that the $5,000 I made from the option fee, plus the $200 a month profit from the rent, and I will make a cool $25,000 or so in the first year IF my first rent to own tenants (tenant-buyers) buy the house.
In all reality, this likely won’t happen. It is quite common that people do not follow through with their investment, which means I get to go through the whole thing again with a whole other rent to own buyer.
Do you get it yet? Rent to own means OPPORTUNITY.
It is an opportunity for my tenant buyers to begin a home-owning process without having to worry about getting a mortgage right away. There is an opportunity for them to get their credit situated while also moving into a home they want to buy. But, there is also a great opportunity for me as an investor to make some excellent money on the property, whether or not this ends up the right fit for them.
This is why I love lease options and rent to own, especially for new investors. The opportunity all around is fantastic!
If you want to learn all about this incredible way to get involved in real estate investing, make sure you check out my premier course First Deal Done Fast. It is absolutely the best course on the market to give you the nuts and bolts, no-frills, down to earth, absolute essentials to get you ready to make your first deal FAST and change your life in the process. Check it out now.
What other questions do you have about rent to own? Comment below, or better yet join the Facebook group and get involved in the lively chats happening over there daily. You can see what other She Buys It students have gained in knowledge and how they, too, are changing their lives through real estate investing.
It’s never too late to make a change. Decide today that the time is now.